Greek Democracy Could Be Costly

Euro Pacific Capital

Nov. 3, 2011, 5:15 PM

By: John Browne Thursday, November 3, 2011

When the news broke earlier this week that Greek prime minister George Papandreou would seek a popular referendum on the bailout deal that had been so torturously negotiated over the previous months, financial panic quickly emerged. A "no" vote by the Greek people would likely lead to a partial dissolution of the Eurozone and could be the beginning of the end of the euro currency itself.

As it turns out, Mr. Papandreou's seemingly democratic gesture was more likely a political tactic to lure the opposition conservatives into sharing the political burden of passing the bailout deal. Although many of these conservatives had likely supported the bailout package, they kept their distance due to its extreme unpopularity on the street. They had seemed perfectly content to let all the political heat fall on Papandreou, who no doubt would have fallen when the deal took hold. By calling for the referendum, Papandreou brilliantly forced their hand. Not willing to risk a failure of the deal, and an expulsion from the Eurozone, the conservatives reversed course and publically supported the package. Papandreou then cancelled the phantom plebiscite.

But the affair should remind us all just how fragile the euro actually remains. In reality many stumbling blocks remain that could force Greece out. As the world's second currency, the euro's collapse would create a massive currency crisis in the European Union, the world's largest economy, possibly triggering a massive depression.

From its inception, the EU grew based largely on deceit, political bribery and corruption. Indeed, its accounts have remained unsigned by its auditors for the past fourteen years. Progressively, it has trampled democracy underfoot. The EU has an elected parliament but, as was the case in the former Soviet Russia, the elected body has no real power.

Whenever nations, such as France, Denmark and Ireland have voted in referendums against EU membership, their votes have been virtually ignored. Many of the main contributing nations, such as Germany and the UK, have been denied a referendum. In the case of Great Britain, the leaders of all three major political parties recently gave election promises of a referendum on continued EU membership. Last week, however, Prime Minister Cameron, who promised a "cast iron guarantee" of a referendum, led the three major party leaders in imposing a three-line whip to stifle a consultative backbench parliamentary vote for a referendum.

When the Greek referendum looked like a possibility, a thinly disguised panic erupted along the corridors of power in Europe. Reports came in that even Angela Merkel, the even tempered German Chancellor, had become highly agitated. If Greece were to vote to leave the euro and even the EU in order to renounce its economically suffocating euro debts, it is not unlikely that the other so-called PIIGS (Portugal, Italy, Ireland and Spain), would follow suit.

Like Greece, all the remaining PIIGS have been huge net beneficiaries of EU membership. Initially, trainloads of cash were given to them by the major contributing nations, in particular Germany and the UK. The PIIGS enjoyed a free market of some 500 million consumers and were able to borrow on financial terms offered only to triple 'A' issuers. In response to the mirage of burgeoning prosperity, financed by fiat money, they borrowed far beyond prudent levels. When the global recession struck, the over-borrowing exposed national insolvencies. The cure, insisted upon by the economic 'doctors' from the 'troika' of the EU, ECB and IMF, was even more debt and austerity. Democratic objection was brushed aside.

It was unlikely that the troika believed that the problem of excessive debt could be solved by more debt and that austerity would improve any debtor's ability to service debt. However, reality had never been a guiding principle within the EU. Far more important was the need to paper over problems and pretend that the grand vision was viable.

The unwinding of PIIGS debt is serious enough. But any breakout of democracy could be disastrous. If past bribes are forgotten and troika threats are seen as foreign interference, the PIIGS could vote to leave the EU en masse. According to the precedent set recently by Iceland, they could default entirely on their debts. Potentially, it would be catastrophic, not just for the EU, but also for the entire global financial system.

Financial planners and politicians could be faced with a possible depression accompanied by a breakdown of confidence in fiat currencies if either the euro or the EU collapses. With both the dollar and the number two global currency (the euro) facing an uncertain future, investors would likely be wise to maintain some exposure to stores of value, such as precious metals.